More Retirement Plans Add Auto-Enrollment, Auto-Escalation Features

Defined contribution plans are also innovating by adding restrictions that can ultimately help employees save for retirement. For example, 57% of employers with publicly traded stock include that stock as an investment option in their defined contribution plans, down from 63% in 2015, and 31% of companies offering that option limit the amount of those contributions, up from 24% in 2015.

(Related: Retirement Assets of Many Households Fell Between 2013 and 2016: CRR)

Owning company stock in a retirement plan essentially commingles an employee’s financial capital with their human capital, increasing the risk in their financial plans, according to Christine Benz of Morningstar, who wrote a column on the topic late last year.

The most dramatic example of that risk was Enron’s 401(k) plan, which was heavily invested in company stock that became worthless when the firm went under in 2000 and eventually led to passage of the federal Pension Protection Act in 2006. Some defined contribution plan sponsors have been sued for violating the PPA and their fiduciary responsibility for including company stock as an investment option when the company’s stock price declined sharply.

Another restriction that plan sponsors have instituted is a waiting period between employee loans from defined contribution loans. Even though the employee usually reimburses him or herself when repaying the loan, the withdrawal of funds, even temporarily, reduces potential gains.

Other retirement plan changes highlighted in the Alight Solutions report include the predominance of target date and target risk plans, offered by 97% of plans, compared with just 77% a decade ago, and the use of outside investment firms to serve as a co-fiduciary to a plan, along with the plan sponsor. Ninety-one percent of plans surveyed use an investment consultant as a co-fiduciary, known as a 3(21) fiduciary, which shares fiduciary responsibility with the plan sponsor.

The survey also found that two-thirds of employers are concerned about plan costs, up from 57% just two years earlier and that nearly half use flat-dollar fees per participant to pay administrative costs, almost double the percentage two years ago. Sixty-one percent of plan sponsors surveyed replaced funds with lower-cost alternatives, up from 56% in 2013.

The Alight Solutions report, however, doesn’t include the average or median costs of plans or the change in costs over time but shows the way costs are shared between plan sponsors and plan participants. Employees who participate in defined contribution plans are responsible for about 70% of the administrative costs but only about half the custodial and investing consulting fees, which they share with plan sponsors.

— Related on ThinkAdvisor:

• Advisors, Plan Sponsors Out of Sync in DC Plan Space 
• Robert Reynolds: Here’s How Workplace Plans Can Save Retirement